Thursday, August 25, 2011

Bank of America: time everyone took a long cold shower and sobered up

Forward: this was printed about four hours before Berkshire Hathaway took a $5 billion stake in Bank of America under sweetheart terms. Firstly Buffett got better terms than me - it helps being known as the world's greatest investor. Second, the rapid appreciation in my position is dumb luck.

I am long Bank of America on my own behalf and on the part of my clients. It has not been a fun experience. (We have had great returns at Bronte but) Bank of America is one of two stocks on which Bronte has lost more than 3 percent of the portfolio.* So you can see this note as written from the perspective of a Bank of America loser.

You might ask if I am putting my money where my mouth is – and I am a little. We purchased some more BofA below $7 but not much. Why not much? Risk control. Nothing else. Like most “value investors” we believe the right response to a stock we like going down is to buy more of it. As people who are (sometimes painfully) aware of our fallibility, we know repeatedly doubling up on a stock with tail risk is a way of getting pole-axed. So we added but did not pile in.

That said, I should explain how I think about Bank of America right now.

The problem everyone is talking about is liability for fraudulently originated mortgages – mostly mortgages originated at Countrywide. Bears argue (correctly I think) that BofA has under-reserved for liability problems associated with past mortgage origination. Some bears suggest large numbers ($50 billion is often quoted) for the real liability. They argue that BofA will be forced either to insolvency, a further bail-out or to raise a lot of capital under highly unfavorable terms (thus crunching the existing equity holders).

There are other bear cases – and I will get to them – but I want to deal the the main bear case up front.

First lets get the capital argument sorted out. Bank capital can't be accurately measured. There are just too many estimates. Steve Randy Waldman (at the indespensible Interfluidity blog) says it better than me when he points out just how many estimates go into measuring bank capital and how large those estimates are relative to the stated equity.

Over a decade or more you know whether you got it more or less right or not. Canadian and Australian banks have simply spat out money – great gobs of it – for twenty years. I do not know whether the capital or profits are stated right (and nor does anyone else) but I can be certain that these banks have been very profitable. Japanese banks by contrast don't seem profitable on a decade-long view.

But on a day-to-day basis capital can't be measured and it is meaningless to say that the bank has $50 billion too much or too little capital because you can't measure that either.

We can find out ex-post (that is after a liquidation) whether the bank was egregiously under-capitalized or not but it is very hard to tell on a day-to-day basis. I thought Lehman was insolvent in 2006. Ex-post it probably was insolvent in 2007 – it operated for quite a while after that. I never thought WaMu was insolvent but the regulator disagreed with me. Ex-post in that case I think I was right on the regulatory capital but was not right on stock.

That doesn't mean banks don't get themselves into trouble by having too little capital. They blow up with alarming frequency. But it is not actually too little capital that is the problem. Banks can operate with negative capital for years (as per Japan). It is one of two related problems:

(Type A Problem) the bank suddenly has losses so large and so unavoidable and generally so fast that any regulatory capital amounts are just smashed and the bank goes regulatory-insolvent or is forced to raise capital under disadvantageous terms or to find a “bridegroom or a suitor” or the regulator takes them over.

(Type B Problem) the market loses faith in the bank and the funding dries up which causes the bank to have liquidity troubles.

Type A problems are rare, Type B problems are much more common.

The archetypical sudden-death of a bank problem is Barings. Nick Leeson lost US$1.4 billion in the Singapore Futures Market and the loss was revealed in a single day. This was twice the bank's stated capital and Barings was forced to find a suitor. They sold themselves for a dollar.

This sort of loss is rare for large institutions (though more common for smaller institutions with government guarantees). Large institutions reveal their losses over time. That is important because operating income (in the context of a bank income before provisions and tax) can be used to shield the loss. If a bank takes its losses slowly enough it can shield very big losses this way (albeit at the cost of appearing zombie-like for years). The champions in slow-loss revelation are Japanese banks who spread losses over more than fifteen years and never breached stated regulatory guidelines on their accounts.

Because banks have quite a lot of discretion about how they book their losses and most losses can be spread over-time just running out of stated capital is not the common way for a bank to get into trouble. [The exception is small banks with guarantees as per the US and the only way they ever seem to leave is by rolling losses until they are comically enormous compared to stated capital.]

You see banks deferring losses every cycle. When the crisis hits everyone screams the bank is under-reserving and guess what – everyone is right. But the bank gets to take its losses over time and that suits the bank because the bank tends to have high pre-tax pre-provision earnings in a crisis and time cures things. When you take losses is subjective most of the time. In bad times banks lie about losses because they can and it is their interest to lie. This is – as Buffett has noted – a self-assessed exam where the penalty for failure is death.

Of course if the losses are too fast and too sudden the bank can't spread them. When someone is not paying their mortgage extend and pretend is an option. When someone actually throws back the keys and walks out you have to take the losses. Enough of them at once and you get the Nick Leeson situation, big losses which you have to book now. But it is easy to extend and pretend so banks do.

The more common way banks get into trouble is when people don't trust them any more and they can't fund themselves. This happened a surprising amount in the crisis. Sometimes we discovered the “bank” was grotesquely insolvent (Lehman Brothers). Sometimes it was only marginally problematic (Bear Stearns). I still believe Washington Mutual was solvent and the run was a panic.

You can't measure bank capital accurately but there is a way in which banks can have too little capital. They have too little capital when they can't convince regulators or creditors that they are themselves a good credit.

But absent that (rather hairy) data point I lean on the fact that the “too big to fail” rules of the game are well understood at the moment whether Yves Smith or Paul Krugman likes them or not. No big bank in America is going to be let fail. Ultimately the credit of Bank of America is synonymous with the credit of the United States of America and last I looked at US bond pricing that credit was good.

In other words BofA has enough capital to raise money in the bond market because its real capital is not something on its book. Its real capital is faith and credit of the United States. And because of that the bank won't fail through a wholesale run. Besides Bank of America has a lot of short-term liquidity. Not enough to save them from a mega-catastrophic run of course but they can deal with most things and a mega-run relies on the too-big-to-fail consensus breaking down.

The only capital risk to BofA then is one that regulators find them poorly capitalized and force them to raise capital or the like. That is definitely possible but in my view unlikely.

It would happen if BofA were to book a sudden 50 billion in provisions for mortgage-fraud settlements. But that is the legendary self-assessed exam where the penalty for failure is death.

You see these are litigation losses not credit losses and the one thing that everyone agrees on about litigation is that it is slow.

For Bank of America slow is good. Very good. You see BofA has more than 10 billion dollars in pre-tax pre-provision earnings every quarter. This number is falling but it still very large.

If Bank of America really has 50 billion – no – lets get really bearish – 70 billion in additional losses to take but the litigation lasts seven years it will eat only a quarter of the pre-tax, pre-provision earnings over that period. It will dampen earnings but can't cause BofA to run short of regulatory capital.

And I am pretty sure they could stretch the litigation five years if not seven. I have seen court cases where discovery lasts that long.

So in summary Bank of America won't fail because the market does not want to fund it. It is “too big to fail” and its credit is really the credit of the US Government. And it can't fail because it needs to take too many losses too fast and runs out of regulatory capital. These are litigation losses and they offer plenty of time for deferral against future income.

In other words this Bank of America panic is just a panic.

And at the risk of sounding like Jim Cramer: Buy.

Where I can be wrong

Above I am talking my book. I own Bank of America shares. My clients own Bank of America shares. I want to explore the ways I can be wrong. After all it could cost our clients a further 5 percent if Bank of America fails.

The first way I could be wrong is if there is another big credit cycle (not old stuff, new stuff) caused by a deep, nasty double-dip recession. In that case the pre-tax, pre-provision income of the bank may be committed to paying off another round of credit losses and not be available for litigation losses.

The main defense the bank would have against that is that the litigation losses can be deferred for very long periods so the bank might deal with one fire (new credit losses) first whilst it leave the other fire (litigation losses) to simmer. It would not be nice for shareholders (no dividends or capital growth for seven years) but it is not devastating.

More worrying is my assumption that the pre-tax, pre-provision earnings are solid. They are clearly falling right now. In Japan these fell for ten straight years – and when you thought that bank margins could not get any lower they went into a bit of a decline.

I once wrote two posts on why I did not think the Japanese outcome was likely for American banks. Go back and read them (links here and here). Those posts don't look that good any more. America is looking more and more Japanese. Pre-tax, pre-provision earnings for banks is falling faster and further than I thought possible.

A small amount of inflation (surely the Fed will print money until that happens) fixes that problem – but that was my argument 24 months ago and that argument is looking less right every day.

The third way I could be wrong is if litigation is not as slow as I am guessing. There could be some kind of summary judgement along the way. But then maybe not. I genuinely do not know enough about American litigation practices to offer an informed opinion.

The fourth way I could be wrong is if the Government guarantee is called by a really skittish market. Government guarantees (implicit or explicit) are hardly what they used to be. That said America prints its own currency. And the credit markets seem to think the US government is solvent. Nonetheless I can't rule it out either.

The fifth way I could be wrong is if the regulators themselves call it. Bank of America is a beneficiary of an implicit government guarantee. That in a normal world gives the government some over-arching regulatory rights. They could determine that there really are $50 billion in provisions necessary and force Bank of America to provide rapidly. If they did so then a capital raise would be necessary because the Government forced it.

Governments have power. If they use it against existing Bank of America shareholders then I will lose. Some of the anti-Bank-of-America bloggers (and I am thinking mostly of Yves here) have that view because they believe government SHOULD use that power against banks. I suspect in that she is right – but my job is to make money for my clients – the question is not whether they should use that power, the question is whether they will. In that I think I can rely on the cravenly pro-finance Obama administration.

There is a final way I can be wrong - and it is a way that worries me more than almost any other. That is Bank of America just falls apart from a systems basis.

I have a friend who had a tax lien put on her house because Bank of America misreported something. It took her six months to get it taken off. There are stories of houses with no mortgages being foreclosed on. There are stories about people getting free houses because the bank loses the mortgage documents.

A bank only has value if it can perform the function of a bank - and top of that list is keeping the client accounts straight - knowing who owes and who owns what and having the documents to prove it.

On that Bank of America is surprisingly inept. That is what comes of doing too many bank mergers.

And of all the things that worry me about BofA their systems failures are the ones that worry me most. You hear too many stories and the stories are from credible people without an axe to grind.

If it were not for that worry I might have added (yet another) percent to my Bank of America holding. But risk control is not lost on me - so I am sitting pat.

There you have it...

My case for Bank of America right now. It is the case of someone who has marred a very good record (about 100 percent above index in just over two years) by owning a lot of Bank of America stock. It is the case of another Bank of America loser.

Make of it what you will.

John

*Bronte has only been running just over two years. Given more time I am sure we will find more ways to both make and lose the clients' money. We are proud of our record (even if I do focus a little on the losers...)

**Incidentally I think Yves anti-bank agenda is justified. She is correct that the banks have Washington wrapped up, that real reform is off the agenda and is necessary and that the banks have behaved terribly and that BofA/Countrywide has behaved utterly atrociously. That of course does not mean BofA is insolvent no matter how devoutly she wishes it. Indeed the Washington consensus is a major reason for thinking BofA is not insolvent.

The worry about BAC and friends is that FAB157 has allowed them to obscure things, the first principle of investing is: understand the investment. With banks, and BAC in particular that is nearly impossible. In my mind shorting is not the option, but staying away is. The fight with the banks could end up very messy, the one attractive feature of the US system is the democracy of decision making, as the NY Attorney General has shown...

The biggest threat to BAC right now is the bum rush of checking deposits that will flow forth from the executive level management accounts (and their spouses) and then be deposited by the banker in chief, Obummer, into his re-election war chest after the mortgage settlement is signed.

You mention that your job is to make money for your clients, and I respect that... but don't you also have a responsibility as a citizen of this country to demand justice? I asked this question the other day: http://changetheruler.blogspot.com/2011/08/is-faith-in-economy-equivalent-to.html

How is this hugely dilutive rip-off deal with the Polyamorist good news for the long-term equity holder?

At the bottom of the financial crisis, it made sense for GS to pay billions to get the Polyamorist's seal of approval. By how is it worth it to BAC now? It seems that the BAC management just pissed away a couple of billion of existing shareholders money in present value terms to feel better about themselves.

John, how well do you know the management at BofA? I've got a pretty good sense of the senior guys and the picture isn't good. Basically, they are as psycopathic as the New York bankers, but with little of the sense (being in Charlotte doesn't shapen the mind much!). These are real bumpkins and that is why absent even specific systems knowledge, I would be very afraid.

Similarly, the legal muscle arrayed against them is much, much powerful than most understand. They are real sharks and they smell the blood in the water long before most.

I think the best investment option is what the earlier poster said, "stay away"! I fear here John, you are making a vanity investment, something that proves your skills. But a lot of what will matter here is outside of that impressive skill set.

And don't be so sure about the authorities going easy on BofA. This isn't 2008. Many people have been getting more sophisticated about this stuff in the past few years. Combine that with the people who are just plain angry and it makes much less sense to assume bedrock support.

John, for the education of the rest of us, would you mind discussing another bank that you considered before adding to BAC, and the reasons why you didn't. I share Finster's question about opportunity cost. Obviously, there are plenty of financials that simple don't meet your investment objectives, but with all teh financials on sale, wasn't there at least one other you considered but passed on to buy more BAC. I would love to know the reasons why. Thanks in advance.

Here's what I think -- there is a ton of noise in financial blog commentary that must be filtered out and ignored. Zero Hedge and Blodget are #1 and #2 in people who don't know what they are talking about. Yves does know what she's talking about, but to be fair Yves has never said BAC is about to crater. She's done some analysis in BAC's financial statements and said she's seen holes that suggest more capital is needed.

But that's obvious to anyone who follows BAC. More capital is definitely needed, and it seems like, to me at least, Moynihan is trying to get that capital. And it looks like he got presented an opportunity with Buffett that he jumped on. Dilution or not, Buffett investing in the company is likely to calm down Mr. Market at least for a while and let Moynihan get back to business and not focus so much on the cratering stock price. That's a good thing in my opinion.

But to engage in cheerleading (for or against) some company's stock price, as Zero Hedge and Blodget are doing, is just pointless. To make matters worse, anything that happens they take to confirm they were right. If you didn't listen to Zero Hedge and instead thought for yourself, and bought BAC at $6, you'd already have made a 33%+ return on your money. Worse yet is the people who bought BAC at $10 and then panic sold after listening too much to people pulling numbers out of their ass.

Blodget is already saying he was right because Buffett investment confirms that BAC needs capital. Yes it does, but Blodget specifically said that BAC needs $200 billion in extra capital. Does anyone think Buffett would invest in BAC, even with special, preferred dividends, if BAC had a $200 billion hole in its balance sheet (that can't possibly be filled)? The much more realistic number is $25-$50 billion, which BAC can get to over time. This is why you can't pay attention to these people, they cost you money if you do and they stress you out with their off the wall predictions.

John,Thanks for this post and for the transparency in stating your position in BofA.

I share with you the concerns about the systems integration. It was extremely difficult for Wells and Norwest, and Wells was known as a leader in technology. Perhaps BofA can make it work, as Norwest/Wells eventually did.

I personally experienced a protracted series of communications about a dormant brokerage account from BofA and then from ML. The left hand didn't know what the right was doing, and the level of customer service was abysmal, to be kind.

The cultural fit between a bank and a brokerage firm, especially Merrill, seems a big issue to me.

Finally, if you say Buy, what do you think they can earn a few years out to support your required return? Also, if BofA is a buy, wouldn't similar arguments apply to Citicorp?

My first try at a comment didn't seem to make it through, so I will try again. Like Finster, I am a little puzzled as to the opportunity cost involved in increasing your investment in BAC. When you decided to top up, did you consider investing in another financial instead? As you say, it wasn't a very big additional investment, but I would love to hear more about the process if you in fact considered and rejected other financials. Were there any that you seriously considered but ultimately rejected as having an inferior risk / reward to BAC? thanks in advance for any response.

I think you might be referring to my 12:05 comment re: your competence. I just want to be clear I love reading your work, I just worry that here you are a tad similar to that Fido mortgage insurance co. analyst from your post of a few months ago...

The only reason B of A is still in business is because FASB and Congress changed the accounting standards in early 2009 by which B of A is allowed to "fudge" their true liability. Instead of Mark to Market, we now have Mark to Model... and according to you this is a good thing?! The Mark to Model doesn't even come close to the Historical Cost basis measurment methodology of inventory write-downs (can you say Foreclosure Inventory), never mind the white-washing treatment it gives to all the worthless sub-prime, ALT A, & Ninja CDO paper held by B of A (I meant to say that you and your client's capital) hold(s). And this doesn't even touch the trillions (yes that's "...illions" with a Tr) in potential CDS exposure BofA (sorry, I meant you and your client's capital) hold(s), nor does it account for the substantial second-mortgage liability that B of A (did it again, I meant to say you and your client's capital hold(s).

And yes, I'm putting my money where my mouth is and betting against any further Treasury/Fed bailout of TBTF institution's funding issues and CDS contract failures ( ala GS etc. and AIG). It doesn't take too much of an imagination to think of what would happen to our civilization if the US gov't was to announce that they were again going to "bailout" all TBTF bank counter-party risk at 100% - see google and the "Arab Spring". I hope the PR guy/gal has a good head-start and a clear method of extracation from the imperial podium that that announcement is made from. And any "stimulus" that such an announcement will make on the market for BofA and other TBTF banks will be quickly and swiftly discounted by the market once the realization that the "heroin" that the Treasury/Fed have injected into the patient isn't any better than the last batch... the patient is still terminal.

While I don't think you've properly framed all the outstanding risks of the TBTF system in general, and BofA specifically, for your clients and their capital, I applaud your use of other peoples money by investing in BofA...I need somebody dumber than me on the other end of my shorts. Thank you Sir!

PS - Christopher Whalen of Institutional Risk Analytics should be included on that list your keeping. As everyone knows, he is a "political shill" (tongue firmly planted in cheek) for the left & right and, as I understand it, has stated repeatedly - that he believes BofA is "toast" (my word, not his).

Assuming the BNY settlement is allowed to stand (which it should, this was an agreement between two private parties at arms length and there's no need for government involvement), BAC has said there will be only up to about ~$5B of remaining non GSE R&W exposure that has not already been accrued for. And on the GSE side, they have already settled with Fannie on the most egregious R&W claims. There are only $120B of GSE defaulted + delinquent principal balances remaining, and only a fraction of those will become R&W claims, some of those claims will be rejected, and the ones that aren't will probably still see some recovery rate. (Some of the delinquents will be cured, but I'll just assume others will become delinquent to replace them for simplicity)

So you've got maybe $10B of R&W left? Nowhere near the $100B just being casually thrown out by people that don't know what they are talking about.

This whole crisis is fictitious, it's bloggers and fear mongerers at ZH and BI and NC trying to scare others. They want to see BAC fail because they have general disdain for large money center banks. But in reality, most of our economic transactions flow through these banks, and these banks hold most of the country's loans/mortgages/deposits. I can assure you that people like Henry and Ives don't REALLY want to see what happens by sparking a liquidity crisis at BAC, JPM, C, etc.

John, thank you for another very insightful post. Do you mind sharing why you think that BAC is the right investment out of all its competitors? Is it because the market is the most pessimistic about BAC in contrast to its value thereby most likely to gain the most? All its peers has seen their stock drop and they don't have as much baggage as BAC seem to have.

US government will not allow BOFA to fail but not by injecting equity alongside with current shareholders but wiping them out. Follow the “wipe-out” stream: shareholders, preferred holders, sub debt holders and senior debt will suffer haircut and will be partially converted into equity. US government will fill the rest of capital structure with hot and fresh dollars from the printing press.

Make no mistake we are ahead of a crisis much worst then 2008 in both sides of the Atlantic.

Jesse Livermore once said:“Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.”

Even though BAC is "too big too fail", a government bailout would likely decimate equity holders like yourself, while rescuing bond holders in order to mitigate systemic risk. Needless to say, this is the government's modus operandi in the case of bank failures.

Secondly, in the absence of a reliable measure of capital, one can infer BAC's capital position based on the actions of senior management.

In the past few weeks, Moynihan has taken steps to raise more capital, by divesting assets and of course accepting an investment from Buffett at unfavorable rates. Granted, one could argue that the latter was purely for signalling purposes.

Lastly, a "deep, nasty double-dip" recession isn't necessary to spark another round of credit losses. The credit losses are already occurring due to the continued decline of the housing market. Case Shiller 20 City Composite touched a new multi-year low in May, the most recent data point available.

T wrote:>>Assuming the BNY settlement is allowed to stand (which it should, this was an agreement between two private parties at arms length and there's no need for government involvement).....

No, it should not be allowed to stand. First, BAC offered BNY's indemnity for breach of fiduciary liability over failure to obtain proper documentation and notify investors of servicing defaults AND indemnity against potential claims over Mellon's participation in settlement negotiations. Because Countrywide has insufficient funds to provide the indemnity, BAC is backstopping them, raising questions about the true relationship between Countrywide/BAC. In addition, under the agreement, the attorney for BYNM receives an $8.5M contingency if the deal is approved.

Also, the settlement precludes other injured parties (investors), who were denied the opportunity to participate in negotiations, from opting out of the settlement. Other investor groups, e.g. a public pension fund with milti-billion dollar investment, feel the 5 cent on the dollar settlement (based on current outstanding balance, 2 cents if use original investment value) is too low for pools where 66% of loans failed to meet reps and warranties. There should have been massive put-backs.

It was BNYM's duty, per the trust documents, to notify investors, at the time of the trust's creations, of loans that had insufficient documentation. BNYM did not do this. Furthermore, BYNM provided annual certification of custody of same documentation. It is now known, and was even admitted in BYNM's petition against BAC, that missing documentation was widespread.

Therefore, you have investors denied the opportunity to participate in a lawsuit whose outcome they are legally bound to. You have rampant fraudulent origination loan docs and mortgages and notes that are missing or were not assigned into the trusts within 60 days of trust creation as required and that can not, under NY trust law, be assigned post-ex-facto. You have conflicts of interest. And you have a settlement negotiated for pennies on the dollar.

William Black, who led the savings and loan investigation in the late '80's has theorized (albeit before Buffett's tithing) that the reason for the $8.5B number was that this was the highest number that could be reached and leave BAC solvent. I suspect he may well be right.

Nonetheless, the deal stinks. The role of state attorneys general is to protect consumers. When did it become acceptable for financial institutions to lie to investors about the nature of investments? When did enforcing laws and protecting citizens from fraud become government interference? Schneidermann is one of the few who is doing the job the taxpayers pay him to do, trying to clean out corruption in our financial system. I spend a fair amount of time looking at land records and I promise you, nothing has changed. The industry isn't going to do it. And until the corruption is cleaned up and laws and regulations are enforced, systemic risk will remain and investors will shy away from plunking down their money.

"politically driven finance bloggers (Yves Smith at Naked Capitalism) should be seen for their (I think justified) anti-bank agenda" and "Ultimately the credit of Bank of America is synonymous with the credit of the United States of America and last I looked at US bond pricing that credit was good."

You are so good normally on stocks it seems to me that when it comes to macro, or more importantly the interaction between macro and stocks (especially banks), your big government bias leads you badly astray.

Just like in Eurozone, the big banks are the leveraged way to bet against the sovereign. They fall first and the sovereign follows as it tries to rescue them. The rubbish I hear that the US can't default is just that, see the CDS for any Eurozone country in trouble to watch how quickly calm turns to storm. The same could happen to the US anytime, as old Bill Rhodes found out about the numerous countries to whom he'd lent money.

And please don't bring up the old chestnut that countries that can print their own currency can't go bust. That excuse is as pathetic as it is sickening in its brutal, big government, realpolitik.

If in the US money center banks are defacto agents of the government, implied by the Henry Paulson "No systemically important banks will fail" policy; then management at these banks should be compensated at government scale wages, and the banking function treated as a utility business model; like the electrical generation sector.

Cumberland advisors also agrees with you and so do I. Basically you are buying an option with bac at the prices. Let's see in 5 -10 years. I think it will be at $50

For contrary investors I can't think of a sector, financials more out of favor.

My concerns are 1) has longer term earnings potential been impaired or over estimated. 2) a possible equity raise.

All these bloggers commentors calling for the end if the world dont live in reality. The system has always been corrupt and it's always easy to find flaws. If the system does fail bac is the least of your worries.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.